Introduction
Transfer pricing refers to the rules and methods for pricing transactions between Related parties or entities under common ownership or control. In the context of multinational enterprises (MNEs), it governs the value assigned to cross-border transactions involving goods, services, royalties, loans, or intangible assets exchanged between subsidiaries, branches, or affiliates of the same corporate group.
The concept is critically important because it directly affects how profits are allocated across different tax jurisdictions. Without proper regulation, companies might manipulate transfer prices to shift income to low-tax or no-tax regions, thereby minimizing their global tax liabilities. For instance, a firm might underprice goods sold from a high-tax country to a related entity in a tax haven, artificially reducing taxable profits in the former and increasing them in the latter.
To address such risks, international frameworks like the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations have been developed. These guidelines advocate for the arm's length principle, which states that the terms and conditions of intragroup transactions should mirror those that would be agreed upon by unrelated parties in comparable circumstances. Many countries have incorporated these principles into their domestic tax laws to ensure fair tax practices and to combat base erosion and profit shifting (BEPS).
Transfer Pricing in Egypt Tax Law and its Executive Regulations
1. Law No. 91 of 2005
Article (30):
If related persons set terms in their commercial or financial transactions that differ from those agreed upon between unrelated persons, and these terms result in reducing the taxable base or transferring the tax burden from a taxable person to another who is exempt or not subject to tax, the Tax Authority shall have the right to determine the taxable profit based on the arm's length price.
The Head of the Tax Authority may conclude agreements with related persons to adopt one or more methods for determining the arm's length price in their transactions. The executive regulations of this law shall specify the methods for determining the arm's length price.
Executive Regulations of Law No. 91 of 2005
Article (38):
The Tax Authority shall verify that related persons apply the arm's length price in their transactions concerning the exchange of goods, services, raw materials, capital equipment, allocation of shared expenses, royalties, returns, and other commercial or financial transactions conducted between them.
Article (39):
The arm's length price referred to in Article (30) of the law shall be determined according to one of the following methods:
Comparable Uncontrolled Price Method (CUP):
According to this method, the price of the goods or services between related parties is determined based on the price of the same goods or services when transacted between the company and unrelated persons.
This comparison may rely on similar goods or services, taking into account the following factors:
- The legal terms borne by each contracting party.
- Market conditions.
- The specific circumstances of the transaction involved.
Cost Plus Method:
According to this method, the price of the goods or services between related parties is determined based on the total cost of the goods or services plus a certain percentage as a profit margin for the selling or service-providing company.
The profit margin is determined based on the margin earned by the taxpayer in transactions with independent parties or the margin earned by another independent party in similar transactions.
Resale Price Method (RPM):
According to this method, the price of the goods or services between related parties is determined based on the resale price to an unrelated third party, after deducting a percentage representing a suitable profit margin for the intermediary party.
The profit margin is determined based on the margin the same seller earns in transactions with independent parties, or it may be determined based on the margin earned by an independent taxpayer in a similar transaction.
Article (40):
Priority in determining the arm's length price shall be given to the Comparable Uncontrolled Price method. If the necessary data to apply this method is not available, one of the other two methods stipulated in the previous article shall be applied.
If none of the three methods mentioned in the previous article can be applied, any method listed in the OECD Transfer Pricing Guidelines or any other method suitable for the taxpayer may be followed.
In all cases, it is permissible for the Tax Authority and the taxpayer to agree in advance on the method the taxpayer will use to determine the arm's length price when dealing with related parties.
2. Law No. 206 of 2020
Article (12):
Every person who has commercial or financial transactions with related persons is required to submit to the Tax Authority the following documents related to their commercial and financial transactions for transfer pricing purposes:
- The Master File (MF): This includes the necessary information about all members of the group of related persons.
- The Local File (LF): This includes the local taxpayer's related transactions and their analyses.
- The Country-by-Country Report (CbCR): This includes information related to the group of related persons concerning the distribution of the group's income, the number of employees, capital, retained earnings, and tangible assets in each country. It also identifies the countries in which the group operates, as well as indicators regarding where the economic activity is conducted across the group of related persons.
The Minister or his delegate may exempt a taxpayer from submitting the country-by-country report referred to above, based on the circumstances of each company and in line with international practices.
If there is a failure to comply with the obligation set out in the first paragraph of this article, the Tax Authority may establish the transfer pricing rules it deems appropriate, without prejudice to the company's right to appeal and object to the Tax Authority's decision, in accordance with the provisions of the executive regulations of this law.
A person subject to the provisions of the first paragraph of this article whose total value of transactions with related persons during the tax period does not exceed eight million Egyptian pounds is exempt from the provisions of clauses (a) and (b) mentioned above. This amount may be increased by a decision of the Minister.
Article (13):
The documents referred to in Article (12) of this law must be submitted as follows:
- The Master File (MF): According to the date of submission of the master file to the tax administration in the country of residence of the parent entity by the parent company of the group of related persons.
- The Local File (LF): Within two months from the date the taxpayer in Egypt submits their annual tax return.
- The Country-by-Country Report (CbCR): Within one year from the end of the tax year related to the audit and assessment.
Failure to comply with the above obligation results in the Tax Authority imposing a penalty of 1% of the value of the transactions with related persons that were not disclosed, in cases where the transactions with related persons were not declared within the tax return, according to the tax return form.
Article (33):
If the taxpayer discovers, during the year following the deadline for submitting the annual tax return as stipulated in item (c) of the first paragraph of Article (31) of this Law, any omission or error in their submitted tax return, they must submit a revised tax return to the competent Tax Authority after correcting the omission or error.
If the taxpayer submits the revised return within thirty days from the end of the legal deadline for submitting the return, the revised return shall be considered as the original return.
Banks, companies, public sector units, public business sector companies, and public legal entities conducting taxable activities may submit a final return using the designated form within thirty days from the date of approval of their accounts by the general assembly, and the tax differences shall be paid based on this final return.
In the event that a revised return is submitted in accordance with the second and third paragraphs of this Article, any error or omission in the return shall not be considered tax evasion.
The taxpayer may submit a revised return in place of the previously submitted one within the prescribed period.
The right of the taxpayer or liable person to submit a revised return shall lapse in the following two cases:
- Discovery of a case of tax evasion.
- Notification of the commencement of an audit in accordance with the provisions of the first paragraph of Article (41) of this Law.
Executive Regulations of Law No. 206 of 2020
Article (14):
In applying the provisions of Article (12) of the law, non-resident legal persons operating through a permanent establishment are subject to the provisions of Articles (12) and (13) of the law.
All legal persons, including companies operating in free zones and permanent establishments of non-resident legal persons, are required to submit a Country-by-Country report/notification – as applicable – according to the guidelines issued by the Minister.
The term "commercial and financial transactions" in applying the provisions of the first paragraph of Article (12) of the law refers to all transactions carried out by the taxpayer with related persons, including but not limited to:
- Buying and selling goods and services of various types
- Buying and selling assets
- Reimbursement of expenses
- Royalties
- Loans of all types and designations, including credit facilities
- Buying or selling securities
- Buying or selling contracts or assignment thereof
- Buying or selling intangible assets
If the taxpayer fails to submit the documents required under the first paragraph of Article (12) of the law concerning their commercial and financial transactions, the Tax Authority may set transfer pricing rules it deems appropriate for each case based on the information available to it. The taxpayer may appeal and object to the Tax Authority's decision, and in such cases, the burden of proof lies with the taxpayer in accordance with the provisions of Article (40) of the law.
The exemption threshold referred to in the fourth paragraph of Article (12) of the law shall be calculated based on the total value of transactions with related persons, including revenues and expenses during the taxpayer's financial year, and not the net value of those transactions.
Article (15):
Every related person is obliged to submit the Master File even if their head office is resident in a country that does not require submission of this file under Article (12) of the law. In this case, the latest deadline for submitting the Master File shall be the same as the deadline for submitting the Local File.
The deadline for submitting the Master File shall be as follows:
- If the parent company is resident outside Egypt, the deadline for submission is according to the date the Master File is submitted in the parent company's country of residence.
- If the parent company is resident in Egypt, the deadline shall correspond to the date of submission of the Local File.
Article (16):
In applying the provisions of Article (13) of the law, the taxpayer shall pay the Tax Authority an amount equal to 1% of the value of transactions that were not disclosed in their annual income tax return. This amount shall still be collected even if the taxpayer disclosed these transactions within the Local or Master Files.
Article (17):
If the legal deadline for submitting the Master File, Local File, or Country-by-Country report/notification is exceeded, the Tax Authority shall require the taxpayer to pay a penalty for non-compliance with the provisions of the first paragraph of Article (12) of the law, using Form No. (3 Payment).
Article (18):
In applying the provisions of the previous articles, the amounts payable to the Tax Authority for failure to comply with the provisions of the first paragraph of Article (12) of the law shall be calculated on the total value of transactions between related persons for items (2), (3), and (4) of the last paragraph of Article (13) of the law, and on the total value of transactions with related persons that were not disclosed in the case of non-disclosure for item (1) of the same last paragraph, according to the rates specified in Article (13) of the law.
Article (19):
The guidance issued by the Minister shall be the governing basis for the contents of the Master File, Local File, and Country-by-Country report/notification, including data, sections, information, and rules.
The submission of the Local File, Master File, or Country-by-Country report/notification shall not be technically or legally accepted if the required data, sections, information, and rules referred to are not complete.
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